Was the rate cut the wrong move?

The move is having a positive impact on homebuyers and investors, but one analyst believes the Bank of Canada's decision to cut the overnight rate in late January will negatively affect the economy.

“Up until January of this year, the Bank of Canada’s usual method of relaying monetary information was through a defined, transparent process that was familiar to the market,” Paul Gardner, a portfolio manager with Avenue Investment Management wrote in a guest column for the Globe and Mail.

“The central bank had spent more than a decade nurturing this transparency, especially under Mark Carney's tenure. This measured process was abandoned on Jan. 21 with a shocking rate cut.”

Gardner believes the move was unnecessary, pointing to a Canadian economy that is growing at around 2.25 per cent.

To say the move to cut the overnight rate to 0.75 per cent came as a shock is an understatement.

According to a Bloomberg news article about the rate cut, none of the 22 economists who took a Bloomberg news survey predicted a rate cut. And many industry players cried foul over the move.

“Part of the significance of the announcement by the Bank of Canada is not the rate announcement but the fact that they surprised the markets in doing it, which would lead us to believe that there could be further shocks to the system,” Calum Ross of Verco Calum Ross Mortgage told CREW's sister site, MortgageBrokerNews.ca, following the announcement.

“I don’t think further rate cuts are out of the question when they surprise us with this. It’s uncharacteristic for a central bank to surprise the market – the very basis of stability of a financial system is about maintaining the trust and not having surprises happen.”

Of course, the central bank held the overnight rate at its latest announcement, but could further surprise cuts be in the cards? Gardner hopes not.

“… the rate cut will only further fuel the overextended housing rally and private debt consumption,” Gardner wrote. “Over the past several years, the Bank of Canada has been obsessed with lowering consumer debt accumulation. The rate cut goes completely against this astute strategy and blatantly encourages more consumer debt."                       

Source: http://www.canadianrealestatemagazine.ca/news/was-the-rate-cut-the-wrong-move-189207.aspx